Thursday, July 13, 2017

You Can’t Build a Low-Cost Airline Without Low Costs: Norwegian Air wants to upend the market for travel between the U.S. and Europe; but rapid expansion has come at a cost

The Wall Street Journal
By Stephen Wilmot
July 13, 2017 10:10 a.m. ET

Norwegian Air Shuttle served up a reminder Thursday of why disruptive companies don’t always make good investments.

The airline is investing aggressively in cheap trans-Atlantic flights. Last week it announced another raft of new routes between the U.S. and Europe, including $174 fares between Chicago and London from next spring. Norwegian’s long-haul capacity will increase by 60% this year and double next year, notes brokerage Davy.

But rapid expansion has come at a cost. Even stripping out fuel, second-quarter unit costs rose 7% year over year, management announced Thursday. Unit staffing costs ballooned 12% as the company prepared to ramp up intercontinental operations. Second-quarter unit costs, excluding fuel, have now been rising for four years.

This looks like a big problem. You can’t build a low-cost airline without low costs.

Trans-Atlantic flying is currently dominated by three full-service alliances: American Airlines and British Airways parent IAG, Delta and Air France-KLM , and United Airlines and Lufthansa . Having seen their short-haul business upended by low-cost challenger Ryanair , the European players are paying very close attention to Norwegian’s ambitions. All three have launched no-frills long-haul subsidiaries to compete. Norwegian can’t count on the complacency that opened a gap for Ryanair.

The other problem with Norwegian’s mounting costs is that they weigh on cash flows and hence its debt-encumbered balance sheet. Shareholders’ equity accounted for just 8% of total liabilities at the quarter-end. This leverage explains why the stock, which is heavily shorted, plunged 11% in morning trading. Year-to-date it is down more than a third, even as other European airline stocks have soared.

The company’s long-term finance director quit last week. His successor can be under no illusion: If Norwegian really is going to disrupt the current trans-Atlantic oligopoly, it needs to get costs under control.

https://www.wsj.com

4 comments:

  1. Most concerning to me- what are they paying their crew? Are these pilots qualified? Pay people peanuts get monkeys for employees.....

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  2. How about a comparison to WOW Airlines? They seem to be doing fine. So, compared to Norwegian, what are they doing right?

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  3. With their short haul businesses being disrupted by the low fare carriers, you would think the majors would get smarter. I won't hold my breath. I hope Norweigan is successful and others follow. The majors will try to block Gates at major airports. Let's hope the airport administrations don't let them get away with it.

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  4. If cabin crew quality is any indication of pay, all US based cabin crew are overpaid by a significant factor. Starbucks gives better service and they pay what....$10/hour.

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